> <
> http://www.salon.com/tech/htww/?last_story=/tech/htww/2009/03/20/economists_unite/
> >
>
> Economists agree: Print. Money. Now.
>
> It is no secret that economists Tyler Cowen and Paul Krugman have
> profound differences on the proper role of how government should
> manage the economy. Over the course of the ongoing economic crisis,
> they've engaged in an enlightening debate about such topics as the
> effectiveness of Keynesian fiscal stimulus policies via their
> respective blogs and New York Times columns. The libertarian-minded
> Cowen is a fiscal stimulus skeptic; Krugman, notoriously, is not.
>
> So when the two men both greeted, with muted support, the surprise
> news that the Federal Reserve planned to engage in an aggressive
> strategy of "quantitative easing" to loosen up the credit crunch, you
> had to take notice. The Fed announced on Wednesday that it will buy
> $1.2 trillion worth of U.S. Treasuries and other bonds, in an effort
> "to provide greater support to mortgage lending and housing markets,"
> and "to help improve conditions in private credit markets."
See also:
http://www.economist.com/finance/displaystory.cfm?story_id=13326779
Money's muddled message
...
The quantity theory of money holds that the money supply, multiplied by the rate at which it circulates (called velocity), equals nominal income. Nominal income in turn is the product of real output and prices. But does money supply directly boost nominal income, or does nominal income affect velocity and the demand for money? The mechanism is murky.
Central banks control the narrowest measure of the money supply, called the monetary base—typically, currency plus the reserves that commercial banks hold with the central bank. But the relationships between the monetary base, broader monetary aggregates and nominal income is highly unstable.
Central banks have mostly given up trying to target inflation via the money supply. Instead, they study the “output gap” between total demand and the economy’s potential to supply goods and services, determined by such things as the labour force and capital stock, as well as inflation expectations. When demand exceeds supply, inflation rises. When it falls short, inflation falls, and in the extreme becomes deflation. To influence demand, the central banks move a short-term interest rate up or down by adjusting the supply of bank reserves. Changes in the policy rate ripple out to all interest rates paid by borrowers.
The financial crisis has bunged up that transmission mechanism. Risk aversion, fear of default and depleted bank capital have caused private borrowing rates to deviate sharply from policy rates. Central banks have responded by expanding loans to financial institutions, purchasing private securities and buying government debt. They have financed this growth in their assets through increased liabilities such as commercial-bank reserves, swaps with central banks and other ways of printing money.
...